In an interview with GOVERNING, the new head of the National Governors' Association disputes recent data on pension gaps, and lays out his federal priorities.

Dan Crippen just took over as head of the National Governors Association, and he has big shoes to fill. His predecessor, Ray Scheppach, led the organization since 1983. But Crippen has an impressive resume of his own, highlighted by his role as director of the Congressional Budget Office from 1999 to 2002.

Governing met with Crippen this week -- on the same day the Pew Center on the States released its much-publicized report on pensions -- to discuss that issue and others facing the NGA's new top dog.

Governing: What drew you to the job at NGA?

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Crippen: I was actually at the funeral of a friend back in December. He is one of the classic and classy guys in Washington who’ve been in public service. He had done a lot of public service, and I was feeling a little guilty prior to that anyway for having not been back in public service for a while. So I was thinking about what I might do.

Working with governors had been something that had crossed my mind in conversation with another friend. Not long thereafter, this position became open, and I was uniquely susceptible. I’ve worked with governors most of my life. In fact I started out in public service when I was an undergraduate working for a governor in South Dakota. It’s back to where I started in some ways.

Governing:

What do states need most from the federal government right now?

Crippen: The biggest thing is more, for lack of a better term, flexibility in federal programs as they’re being cut. (Some) of the budget cuts that everyone is talking about ... involve programs which have funding go to the states. So, as those programs are cut back, it helps for the governors to have maximum flexibility possible to implement the reductions or changes in priorities or changes in how the program works and manage the reductions better.

Governing:Where do you need more flexibility?

Crippen: Medicaid is one we’re talking a lot about. There, of course, the more flexibly the better. It depends on which states and which piece. But a lot of governors think they could do a better job and more efficient management of the program if it didn’t have quite all of the regulations and restrictions.

Governing:It seems that when money is tight, partisan differences become more apparent. What’s the role of NGA right now, given its diverse political membership?

Crippen: We obviously have to look for the middle ground or a nonpartisan, apolitical ground. My take is a different from yours, [in that] when states have more challenges, it actually brings governors together in some ways. They share big problems and therefore are interested in sharing possible solutions.

I think we’ve seen a little more division at the moment around the whole issue of health care and health-care reforms. There was a lot of division between parties. When it comes to day-to-day stuff, the governors are certainly not unanimous, but they all share big problems and big challenges, so actually I think are probably more amenable to shared solutions.

Governing:The big Pew report was released today. It said the average funding level for state pensions fell by 6 percentage points to 78 percent over the last year for which data is available. What sort of things do you see states doing to address that problem?

Crippen: I think … probably the headlines overstated the findings. It was not much [of a drop]. So it wasn’t a really dramatic change. Overall, as you’ve said, the states are mindful of whatever the gaps are and are taking actions as we've seen in headlines and elsewhere... to both manage the funds better but also reduce future obligations somewhat.

There were some pension plans that actuaries will look at and simply tell you aren’t affordable. No matter what your assumptions are about how the stock market grows, they’ll just never get there. So, there’s some changes in the program. Something less than, but around 20 states have changed parts of their program just this year alone.

Governing:There’s a recent article in the New York Times that says more states and cities are looking at changing pensions for current employees, which were traditionally considered immune from pensions changes. Will more of your members consider doing that?

Crippen: I think it’s outliers more than anything. I think most of the changes, as the question implies, are for new employees. That’s where most of the change will come. The states that are more underwater or have bigger overhangs might go to current employees more. But it’s nothing I expect to happen very widely or often.

Governing:Douglas Holtz-Eakin’s organization just held an event titled “Are employee pensions the cause of the financial crisis in the states?” What’s your answer?

Crippen: No.

Governing:Aside from market conditions that contributed to the pension problem, states also bear some responsibility. Some weren’t making contributions to the pensions that actuaries were recommending. But state officials insist they can get out of this mess. Why should taxpayers believe them, if they helped cause it?

Crippen: A couple of things: Most states are making (changes) and the Pew report actually said that. Obviously when times are very tight, priories and tradeoffs between funding education and fully funding this year’s pension contributions becomes a tough choice. But they generally catch up.

And again, they dropped one percent last year. [Ed. note: According to the Pew study, it was a drop of 6 percentage points.] It tells you this is not something that’s going downhill. It’s pretty well stabilized. We could make a few assumption changes and show full funding. That’s not what we want to do. But it becomes part of the overall priorities for the citizens of a state, and I don’t see any state trying to duck those obligations. There’s no reason to believe that state level pensions are going to take any state down.

I think there are other issues out there with healthcare that are important, with growing costs, and in some sense … that’s a much more problematic outlook than pensions.

Governing:Health-care costs are a growing burden for states. Is Medicaid a sustainable program or are we going to reach some sort of tipping point? A professor speaking at a recent Council of State Governments webinar said it’s time to end traditional Medicaid, state over, and let states decide whether to participate, so they can be clear about its terms.

Crippen: Well, they can all withdraw. They have that choice now, and we haven’t seen anybody do it.

Clearly health care writ-large is unsustainable. You could ask that question about corporations, about federal, about states, or about local. The answer is kind of the same. No, we can’t grow healthcare faster than the economy forever.

Governing:What’s your view of the proposal in Rep. Paul Ryan’s budget to turn Medicaid into a block grant program?

Crippen: There was letter described as a DGA letter and an RGA letter – the RGA letter supporting the Ryan budget mostly, and the block grants, and the DGA letter mostly not. So we’re split pretty much down the middle in terms of the Ryan budget and that kind of block granting

But there’s a difference between that -- forcing every state to accept a block grant – versus states asking through a waiver process for something that might look like a block grant. There are already states that have programs that look similar to that now. And there will be more waiver requests coming in, given how tight budgets are and how much Medicaid is costing. Oregon is preparing a waiver. New Jersey is preparing a waiver.

So, the governors would agree that other governors should be able to ask for the kind of flexibility they need to administer the program in their state, even though we don’t agree that everybody should have a block grant, which is the national Ryan policy.

Governing:We write about local governments as well as state governments. Local leaders feel that with the feds putting the pinch on the states, the states are in turn putting the pinch on locals. What steps will state governments to help local governments, especially when there are state statutes that restrict local revenue generation in many place?

Crippen: It’s certainly discussed. I wouldn’t say it’s in the top two or three [issues]. Governors certainly understand when they reduce education spending at the state level it means more pressure on local governments, and one thing of course is that they have a shared tax base. Some localities have sales tax and income tax just as the states do. Those revenues are beginning to come back some, as you know.

Property taxes are still lagging, which is still a local revenue source. We saw again … that house prices nationally are still declining a little, which means in the future, with some lag, property tax revenues will go down.

The feds go down first, then the states, then the locals, when it comes to revenue. As the feds pick back up, states pick up, locals lag. They’ll be coming back but with a lag, and governors are quite conscious of that. But when the feds cut, the states cut, and it does get passed down to some localities.

Governing: Revenues will slowly bounce back at the state level, but are we ever going to return to where we once were? Has there been a sea change, and are we going to have to re-evaluate what services state government can provide?

Crippen: I don’t know that it’s a sea change, but I think we have had one of those moments where the economy and demography collide. First, we’re still not back, even with the FY 2012 projections. The budgets states are now working on, we’re still below the FY 2008 levels. Even though things are getting better, they’re still way below where they were three or four years ago. So they haven’t recovered completely.

Second, some of the erosion in the tax base may be, if not permanent, certainly slow to recover, property taxes being the obvious one. Even though housing values may bottom out it’s going to take a while for those values to come back up and revenues to climb with it.

Sales tax bases are eroding some because of Internet sales. So that may never come back.

More importantly, as my generation retires, it’s putting big demands on government of all levels. We’re going to go from 40 million retirees to 80 million in the next 20 years. So, whether its Medicaid, whether it’s long-term care, nursing homes, and lots of health requirements in addition to demands for more open spaces, and walking paths, and whatever else my generation decides they want to be politically active in – we’re going to be putting demands on government.

At the same time when you retire, you’re not generating as much income or as much tax revenue for a jurisdiction either. So, instead of contributing to the education of kids, we’re going to be demanding resources and not paying much taxes. It kind of flips. So the demographic, along with the economic, means these are a long term challenge. It’s not just that we can recover and in two years it will be rosy again.

Governing: So is that something you’ll let your successor deal with?

Crippen: Well, hopefully we get some of it done. I started doing some health care work about 15 years ago because I decided my kids couldn’t afford me. It’s mostly still true.